World Economy

Italian Banks Sinking Under High NPLs

Italian Banks Sinking Under High NPLs  Italian Banks Sinking Under High NPLs

Italian banks are in trouble, burdened by an estimated 200 billion euros’ worth of non-performing loans. Now bank balance sheets are to be cleaned up. But will that be enough to restart Italy’s sputtering economy?

Italian Prime Minister Matteo Renzi was in Berlin on Friday to pay a visit to Chancellor Angela Merkel. They’ll have had much to discuss: European refugee policies, the Syrian war, relations with Russia.

And perhaps they’ll also catch up on the state of Italy’s banking system, Bloomberg reported.

It’s been known for years that Italy’s banks are carrying a lot of dead wood on their balance sheets. The ratio of non-performing loans as a proportion of banks’ loan books was recently estimated at 17.5% for the banking system as a whole.

The level of bad loans burdening Italy’s bank balance sheets is much higher than in other major European countries. As of 2015, 2% of the loans on the books of German banks were classed as impaired; France’s number was four, and Spain’s 7%, according to Royal Bank of Scotland estimates.

 Bad Bad Loans

Banca di Monte dei Paschi di Siena, the world’s oldest surviving bank–it was founded in 1472–has a particularly droopy loan book. It reported having nearly €47 billion ($51 billion) in “gross non-performing exposures” at the end of December, more than any other Italian bank.

The Italian banking system’s high NPL ratio isn’t news, but Italian bank shares have had a dismal ride over the past few months, and a sense of impending crisis has grown since the turn of the year.

Shares in Monte dei Paschi di Siena declined by nearly 70% between the beginning of October and mid-January. Four other major banks declined between 20 and 40%.

 Taking Action

Renzi’s government has finally begun taking serious steps to clean up Italian banks’ balance sheets. Negotiations between Italy’s finance and economy minister, Pier Carlo Padoan, and Europe’s competition commissioner, Margrethe Vestager, culminated in a deal this week under which “bad banks” will be set up.

The “bad banks” will raise money from investors to buy portfolios of impaired loans off banks like Monte dei Paschi, UniCredit and Banca Populare–at steep discounts, of course. The idea is that some of those bad loans will eventually get repaid, at least partially; the portfolios aren’t completely worthless.

Vestager insisted on a deal intended to prevent Italy’s government from taking part of the banks’ accumulated losses on its own balance sheet, because that would contravene European rules against state aid to the financial sector.

Government guarantees will provide partial protection to bad bank investors. But in return, Italian banks will buy default insurance for their NPL portfolios at prices meant to accurately reflect each portfolio’s risk of default. This will hopefully allow the Italian Treasury to avoid taking net losses.